There is a home listed FSBO with the option for owner financing near me. The owner bought it for $68k as a foreclosure and rented it for four years for $1,200 a month (she provided lease records). She didn't put any work into it after buying it and it is now listed for $115k and worth about $125k in its current state. She mentioned that there are cosmetic fixes to bring it up to the standard of other houses in the area, which is why she has discounted it the $10k below market value. It had some water damage near the chimney flashing on the inside and outside, a water leak somewhere in the roof that was repaired cheaply, and old aluminum windows that are in need of replacement (home was built in 1965).

So, I offered $85k, either in cash or financed, hoping to give myself a little wiggle room with the repairs. It was contingent on inspection with a 30 day escrow. I have not had a contractor check it out, but estimate that the repairs and minor updating (paint/carpet) will take ~$15-20k. Once it is all the same color and the issues are fixed it could rent for $1,300 in this area with the potential of renting for up to $1,500. Appreciation in this area is on par with inflation, so it's unlikely that the house will all of a sudden double in value or anything like that. 

The seller would not take my offer of $85k, but did offer owner financing with the following terms:

$25k down, $80k note at 7.75% for 15 years. Payment to seller: $753 per month. 

How would you respond? Does it still turn out to be a good deal? What might your counter offer be? I am not sure where to go from here, if I should just drop it, or if we might be getting close to a deal where I can still make it work.